While not entirely unexpected, the increase in the VAT rate announced in Finance Minister Malusi Gigaba’s 2018 Budget speech will place employees, already struggling in the current economic downturn, under even more financial pressure. Although personal income tax rates were not raised, no inflationary adjustment for the top four income brackets means higher income earners will be paying more of their salaries to government in real terms. The bottom three income tax brackets were only partially adjusted for inflation.
The tax increases are inevitable as tax payers have to fund some of government’s plans, such as the well-intended free higher education plan which was announced towards the end of last year. As a result many South Africans are looking at ways to ensure they make the most of their available means to reduce their monthly tax commitments. Nashalin Portrag, Marketing Actuary at Momentum Corporate, says proactive steps by employers to help employees sustain their financial wellness in the wake of these tax hikes, will help avoid a slump in company productivity levels.
The latest Momentum/Unisa Consumer Financial Vulnerability Index (CFVI) results suggest South Africans’ financial vulnerability may be on the rebound. During the fourth quarter of 2017, consumers felt slightly less financially vulnerable than during quarter three. Despite small improvements in all four sub-indices, consumers remained in the very exposed category with regards to income, savings and debt, and moved into the mildly exposed category for expenditure. There is a good chance that these minor improvements in financial vulnerability will be reversed by the hike in taxes.
Momentum’s Effective Employee Index research shows that employees who feel financially vulnerable are more distracted and stay away from work more often than those who are financially more secure. It estimates the cost of lost productivity as a result of absenteeism in South Africa to be up to R70-billion, or 2% of GDP. The cost of lost productivity as a result of "presenteeism" – when an employee is present at work but not focused on their job due to a financial or some other stressor – is estimated to be four times as much as absenteeism.
Portrag says one of the steps employers can take to reduce the impact the tax increases will have on employee financial wellness, is to offer employees financial education programmes. This thinking is also supported by the Momentum/Unisa CFVI research results, which highlight that poor financial literacy remains one of the most important reasons consumers are financially vulnerable.
“For example, many employees are not aware how they can use their retirement fund to reduce the amount of tax they pay. Retirement funds such as umbrella pension or provident funds remain one of the most efficient ways to save for the long term. Retirement funds have an advantage over other savings vehicles such as residential property due to the tax deductibility of contributions. Contributions to retirement funds can be deducted from an individual’s taxable income. For an employee with no income other than his salary, the maximum deduction per year is 27.5% of his remuneration limited to R350 000. While the impact differs depending on salary bracket, the average employee could reduce their tax bill by around R200 for each R1000 contribution they make to a retirement fund. For earners in the highest income bracket, this means that for every R1000 they contribute to a retirement fund, their tax bill could reduce by as much as 45%, saving them R450 a month. Most umbrella retirement funds also allow additional voluntary contributions (AVCs), which are once-off contributions, with the same tax saving benefit as regular contributions.”
Portrag says educational programmes can also help employees get on top of debt and other financial challenges. For example, Momentum’s Motheo Financial Dialogues, an award-winning financial education programme, covers a range of financial topics. Areas include helping employees to understand their payslip deductions, highlighting the importance of retirement savings and how their benefits work, guidance on how to get on top of debt, how to talk to the wider family about money, as well as how to budget.
Portrag says “Changing jobs is another area where informed, tax-wise decision-making is lacking. For example, an employee who withdraws his retirement savings when changing jobs could be taxed as much as 36%, which means for every R1000 they withdraw, they lose R360 of retirement savings to the tax man. Failure to preserve is one of the main reasons income replacement ratios at retirement are dismally low.”
Portrag also says we need to remember that physical and financial wellness are interdependent. “When employees feel more financially secure, financial stressors decline, physical health improves and employees are more productive. Vice versa, when physical health improves, medical and insurance costs reduce and employees’ financial vulnerability strengthens.” He encourages employers to ensure that their employees have access to programmes that encourage and reward healthy behaviour. Holistic umbrella retirement funds can offer a solution in this respect, offering engagement programmes that facilitate a healthy lifestyle.
Portrag concludes, “Employers and their financial advisers would do well to look towards their retirement funds to soften the impact the recent tax hikes are likely to have on employees’ financial wellness.”
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